Dividend Increases + Compounding
As we get closer to age 70 when we plan to start taking CPP and OAS, we will need to start worrying about our dividends growing too much (I know, first world problems…). The dividend gross-up formula, which is used to calculate the dividend tax credit that allows our dividends to be taxed at a lower rate, involves boosting the gross value of these dividends by 38% when declaring taxable income. As our dividends continue to grow, this will skew our overall taxable income to the point where we may experience significant if not total claw-back for OAS. Yet, it is not as simple as selling off some of the dividend-paying stock in our non-registered account. Most of our stocks have increased so much in value from when we first purchased them (some pre-retirement) that the capital gain hit would be enormous.
As an alternative, I am starting to investigate how to offer stock-in-kind as charitable donation as opposed to the cash which we donate each year. This serves multiple purposes. First, we would not have to save up cash to make the donation, leaving us more disposable funds for expenses and discretionary use. Second, this will reduce the dividends generated from our account without triggering capital gains. I will be making inquiries with the organization(s) that we usually donate to, in order to figure out if and how this may work. When deciding which stock to donate, I will be looking at the dividends that it generates, the likelihood of future increases, and the timing of when the dividend is paid out. I try my best to make sure that we generate enough dividend each month in a quarter to cover our base monthly expenses and would like to maintain this as I slowly and strategically reduce our dividends.
EQ Bank Notice Account
A hugely traumatic event happened to us last July when our
bank accounts were hacked and money illegally withdrawn. I wrote extensively about our experience and
lessons learned to better protect ourselves here: <https://retiredat48book.blogspot.com/2024/11/how-safe-is-your-money-tale-of-two.html
>. Around the same time, EQ Bank (our
primary bank) introduced the Notice Savings Account which currently pays
a healthy 3% interest but requires 10-days notice for withdrawals. Rather than being an inconvenience to have to
wait 10 days, we see this as a security feature since we will log onto this
account once a week to make sure there are no unexpected pending withdrawals. Rich and I each opened a Notice account and are
using them to accumulate excess cash from our dividend payouts to save for
upcoming vacation expenses and to keep emergency funds.
When the Notice account was first launched, it was paying a
whopping 4.5%. In reaction to the
multiple interest rate cuts from the Bank of Canada, EQ Bank has had to respond
by cutting its rate but 3% is still pretty good, especially since it is not a
teaser rate like other banks offer for 3 months and then reduce their rate to
1% or less.
RRIF Withdrawals
For the past few years, our RRIF withdrawals involved selling stock and taking out cash to pay for major expenditures that our monthly dividends could not cover. In 2024, we had nothing big planned so we went back to our strategy of taking out some stock in kind to boost the income in our non-registered account. Continuing my multi-year plan to aggressively drain our RRIFs before reaching age 70, we each also use cash from our RRIF to pay off enough withholding tax to cover our total projected income tax burden for the year. From my RRIF/LIF, I withdrew shares of Bank of Montreal (BMO) and Brookfield Renewable Corp (BEPC), then sold the rest of my deadbeat Cineplex (CGI) shares as well as some shares of Parkland Fuel (PKI) to help cover the withholding tax that I wanted to pay. Rich withdrew shares of Great West Life (GWO) and dumped his shares of Chartwell Retirement Residences (CSH.UN) to pay the withholding tax, since Chartwell had not raised its dividend in many years.
For a RRIF or LIF account, there is a legislated minimum amount that needs to be withdrawn before the end of each year. If the minimum has not been withdrawn by the user, the institution holding the registered account will automatically make the withdrawal and will arbitrarily sell stock to cover the amount if there is not enough cash in the account. Both Rich and I had completed our withdrawals and exceeded our annual minimums well before the end of the year. So, imagine my shock when late on Christmas Eve, I received a text notification from EQ Bank indicating that Scotia Capital (owner of my discount broker Scotia iTrade) had made a large deposit into my bank account.
Since the hack, we are now extremely sensitive to any unexpected banking notifications. Unfortunately, being Christmas Eve, EQ Bank was closed until December 27 and Scotia ITrade until December 28 so I could not immediately inquire about this. After dismissing the idea that this was fraud, I considered that it could be a clerical error until I remembered about the default auto-withdrawal rule. When I finally got through to ITrade on December 28, the agent confirmed that they had erroneously taken the minimum even though I had already withdrawn more than that. This was disastrous for me since I had very carefully planned my net income and tax paid for the year. This extra amount would push me into the next tax bracket and cause me to owe more tax. I stressed to the agent how important it was for this error to be reversed. He assured me that he would try his best to make it happen but I was not totally confident whether it would happen in time, since the 28th was a Saturday and there would only be 1.5 business days left before the end of the year. Luckily, the extra RRIF withdrawal was reversed by mid day Monday December 30. Even luckier was the fact that I just happened to have enough cash sitting in my account to cover that minimum. Had they been forced to sell stock, I don’t think this could have been as easily reversed if it was even reversible at all!
Stock Portfoilio Changes
Over the past few years, we have been slowly getting rid of stock in companies who don’t raise their dividends or worse, cut dividends. By the end of 2024, we had divested ourselves from CGX, CSH.UN, BEP.UN from our registered accounts. In our non-registered account, we sold Sierra Senior Living Inc. for a small loss since this stock had never raised its dividend in all the time that we held it. Along with Chartwell, this took us out of the health sector which never did much for us from a dividend perspective. With the cash from the sale, we wanted to boost our holding in a company that we had less of in our non-registered account but one that would raise its dividend. Thinking the banks were pretty consistent, we bought more Bank of Nova Scotia (BNS) since that was our smallest holding. Ironically, it turned out to be the only bank that did not raise its dividend in 2024. Hopefully this is just a temporary cash flow issue and they will return to raising in 2025, but we’ll see.
Last year, there was a significant increase in company reorganizations as companies adapted to changes in the market, industry, technology, regulations and tax laws, as well as addressing debt management or looking for efficiencies. Several of the companies in our stock portfolio went through some sort of reorganization with varying effects to their shareholders.
In October, income trust A&W Revenue Royalties Income Fund (AW.UN), which I hold in my RRIF, merged with A&W Food Services to form A&W Food Services NewCo with a stock ticker of AW. There are several implications for me. After the merger, I received 97.3% of my former shares plus cash for the balance. The new stock will pay dividends quarterly instead of monthly although the annual dividend payout per share is supposed to be the same. While I am not happy to have lost shares in this transaction, I do like the fact that the stock is no longer an income trust. This means at some point in the future, I can choose to withdraw this stock in kind to hold in our non-registered account. From a diversification perspective, we will have a new sector to draw income from. For now, I will leave this stock in my RRIF so that I can use the Dividend Reinvestment Program (DRIP) program to grow the number of shares that I own tax free. Unfortunately, the DRIP will not be available until the new company has paid dividends for a few quarters and develops a dividend history. I will keep an eye out for when I can enroll in it.
Also in October, TC Energy Corp (TRP) spun off its Liquids Pipelines Business to create the separate entity South Bow Corp (SOBO) as a strategic move to allow each company to focus on its core business. For each share of TRP, investors received 0.2 shares of SOBO. The dividend payout for TRP was reduced with the intent that it would be offset by the new dividend payout from SOBO. At first glance, it appeared that the combined dividends from the two companies seemed significantly lower than what we previously received from TRP alone. Looking at the SOBO dividend more carefully, I realized that it was being paid in US currency similar to what Algonquin Power (AQN) does. This made the gap much smaller and was a welcome change since it gave us another source of US cash with no currency conversion if we kept the stock on the US side of our accounts.
As a result of the spinoff, we gained SOBO shares in our non-registered account. This would be irritating come tax time since the US dividends would have to be converted to Canadian at the appropriate rate when declaring this income. Rather than having to go through this hassle each year for a relatively small amount, I decided to sell the SOBO in our non-registered account and use the funds to contribute to my TFSA (which had been depleted the previous year for our condo renovations) where I would repurchase the stock. The dividend payouts will provide me with an ongoing source of US cash that I can take out tax free to add to my EQ Bank US bank account without worrying about conversion rates. Until I need the cash, I will DRIP this stock once the DRIP becomes available.
In 2020, two of Brookfield’s Corporation’s income trusts (BIP.UN and BEP.UN) each spun off common class A stocks (BIPC and BEPC) for strategic purposes. Rich holds BIP.UN/BIPC and I have BEP.UN/BEPC in our respective RRIFs. The plan was to DRIP the non-income trust stock in our RRIFs for a few years and then eventually move them out to our non-registered account, again to add diversification to income-generating account. In January 2024, I executed this plan for my RRIF and withdrew my BEPC shares in kind as part of my annual RRIF withdrawal. In December 2024, Brookfield went through another reorganization with its BEPC and BIPC stock to account for tax inefficiencies. In this case there was no effect for the shareholders since we received the same number of replacement shares, and the stock tickers and dividend payouts remained the same.
With all this movement, we are now down to 32 distinct companies (down from our high of 39) with representation in a variety of sectors including banks, telecommunications, insurance, oil and gas, utilities, REITs, Consumer staples and industrials. We maintain our distribution of large/medium/small market capitalization at around 77%/22%/1% and our dividend payout is well distributed between the various sectors and companies. We make sure we hold enough companies so that the loss of dividends from any company will not have a catastrophic impact on our income stream.
Optimize Expenses
After years being on a cell phone plan with Bell that seemed to rise in cost each year, I finally decided to look into whether we could do better than the $85 after tax for 10 gig of data that Rich and I were each paying. We looked online into share plans with Bell, Rogers and Telus but none of them offered anything better. In each case, we would end up with slightly more data for an even higher joint cost. We decided to walk into a Bell store to see if they could do anything for us. What we were told is that the stores had no power to offer deals but we were given the Bell “Customer Loyalty Retention” phone number and that agent was able to offer us some deals.
Our first offer was 120gig of data for $65 per month per person. This is way more data than we would ever use and $20 less than what we were paying so we were ready to accept when the agent offered us a different deal. For $55/month for 2 years, you get 70 gig of data but have to buy a low-end Motorola phone at a cost of $1 per month. I started to say that I did not need a new phone but the agent interrupted me and said, “Think about it”. It means for $56/month (including the cost of the phone), you get 70 gig of data for 2 years and you can throw away the phone if you want. This made sense so we went for the deal. Once the phones were sent to us, we had to put in our existing Bell SIM cards to activate the phones and the plan. Then we could immediately remove the SIMs and return them to our own phones. We ended up with much more data for $30 less per month and can still use the Motorola phones on WIFI as backup if we want. In two years when this deal runs out, I may have to phone again to try and negotiate a new deal.
When we were planning for retirement, we did the research and calculations and determined that it was not worth it to buy regular health insurance since most plans have a cap and the sweet spot to claim enough expenses to make the premiums worthwhile was small. We decided that we would self-insure for the 17 years between our retirement and turning 65 when more medical expenses would be covered. I did buy something called Manulife Catastrophic Insurance <https://retiredat48book.blogspot.com/2013/08/preparing-for-post-retirement-medical.html> which has a high deductible but no cap, to protect me against extraordinary medical costs. With only 4 years to go until we turn 65, this decision to self-insure has turned out to be a good one. There have been very few years where we spent enough on medical expenses to even qualify for the deduction on our tax returns.
Last year turned out to be one of those years. In 2024, medical expenses had to exceed $2759 to qualify for the federal tax credit. An extra, pricey dental procedure and eye care procedure pushed us past this limit. Once we were over and qualified for the tax credit, I looked for ways to maximize expenses in 2024 since we may not generate enough in 2025. I refilled prescriptions that were due in early January at the end of December and scheduled a discretionary eye exam for myself. You can claim medical expenses spanning any 12 months ending in 2024 as long as those expenses were not claimed in 2023, so I was able to pick up a few pill prescriptions from 2023 to add to the total.
Vacation
Wanting to ease back into it after COVID, and also having
limited funds because of our major expenditures, we have taken relatively
moderate vacations within Canada and USA over the previous 3 years. In 2024, we finally ventured back overseas
with a 2.5-week trip to Portugal.
I am in the midst of writing about that trip on my travel blog but it
was a wonderful experience and a relatively inexpensive compared to other major
cities in Europe. Just before COVID hit,
we had first planned a 3-week trip to Portugal that the pandemic ended up
canceling. To prepare for the trip, Rich obtained a BMO Ascend World Elite Mastercard
which costs $150 per year but would allow us to collect points to apply against
charges to our credit card (with a better rate when used for travel), give us
each free travel insurance for up to 21 days at a time, discounts on car rental
and most importantly, 4 free lounge passes per year. We were excited to use those lounge passes in
2020 for our initial Portugal trip, but obviously that didn’t happen.
We ended up keeping the card since it gave us travel insurance for our trips to the States, and we collected BMO points for 4 years. For our Portugal trip in 2024, we finally gained the full benefit of this credit card. We were able to get two free lounge passes at Pearson Airport on the way out, and Lisbon Airport on the way home. The four years of spending and collecting gave us enough points to pay for our airfares both ways. And continuing to spend for the 3 months after we returned home, I was able to use more points to pay off a bit of our accommodation costs.
Recently we have started to load more and more apps onto our iPhones including our Presto, credit, debit and loyalty cards. Not only is using the iPhone and Apple Pay to pay for things more secure than handing over your physical credit card which can be copied, but there was a huge advantage for the BMO Ascend World Elite Card. It cost an extra $50 per year for a second card which I was unwilling to pay. For years, Rich and I shared the one physical card which was really inconvenient. Now, each of us can load the same card on our phones so I can also make purchases using the card while he carries the physical card for the times where a reader won’t accept payment by phone tap or the limit is too high.
